Source: Editorial Comment: Exchange rate key to pricing, minister – The Zimbabwe Independent April 5, 2019
FINANCE minister Mthuli Ncube is certainly one of the sharpest minds in this country. He has colourful credentials, good record and is decorated. As a result, he is respected locally and internationally.
That is why President Emmerson Mnangagwa brought him into his government. So far he has been doing well; he has brought in some technical thinking and valuable skills set to replace typical Zanu PF voodoo economics, but his biggest undoing has been managing the treacherous political environment. He is not well-equipped to deal with Zimbabwe’s murky politics and volatile political situation.
Yet there is a strong relationship between economics and politics. That is why the performance of the economy is one of the key political battlegrounds. Economic issues are inherently political.
With all his knowledge and skills, Ncube this week made bizarre remarks on the economy and pricing. Commenting on the economy and the current wave of price increases, the minister demanded there should be no correlation between prices and exchange rate movements.
“We have been, as Treasury, watching the price increases. I want to hasten to say to those in industry, the retailers, that it is not correct, it is actually bad economics to link price increases to the exchange rate. That is not how you do it,” Ncube said. “It is profiteering … Inflation is your guide to raising prices and not the exchange rate.”
This shows the minister is wallowing in wishful thinking rather than dealing with reality. It is generally accepted there is a link between domestic prices and the exchange rate. Research shows that.
Exchange rate movements are typically symptoms of the environment and other economic dynamics — the exchange rate does not move in a vacuum. Factors triggering exchange rate movements also affect domestic prices. Global and regional economic developments affect domestic prices, including consumer prices, via a number of channels including exchange rate fluctuations.
In Zimbabwe, prices are largely affected by currency volatility and exchange movements. When you use multi-currencies for pricing and transactions, arbitrage and exchange rate changes will always affect prices. This might be unorthodox, but a reflection of underlying problems. Ncube obviously knows this.
Businesses benchmark their prices in United States dollars despite pricing in different currencies, including local quasi-currencies. Prices thus follow exchange rate movements instead of the inflation. Exchange rate differentials and other dynamics will always come in.
What the minister is complaining about — benchmarking prices on the exchange rate instead of inflation — is just but one example of structural distortions embedded in the economy. There are many others. Moral suasion, through rhetorical appeals, persuasion or implicit threats, will not address the problem. Action will.
There is a lot of literature on how exchange rate movements affect domestic prices, especially via exchange rate pass-through. A change in import prices affects retail and consumer prices. Zimbabwe imports huge volumes of consumer goods, especially from South Africa — the country’s biggest trading partner — hence prices are sensitive to exchange rate movements. Ncube ought to know better.
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